Why You Should Ditch Your Loyalty Card

Jessica Stillman is a freelance writer based in Cyprus with interests in unconventional career paths, generational differences, and the future of work. She has blogged for CBS MoneyWatch, GigaOM, and Brazen Careerist.

If you have a loyalty program of some kind, here’s what you’re probably trying to telegraph to your customers: You’re special! We value you enough to take exceptionally good care of you.

But according to a recent Slate article by Brian Palmer, here’s what you’re loyalty card is probably really communicating to your customers: I’m a bad business that can't think of a better way to compete. Hold on to every possible penny.

Palmer’s article lays out the loyalty card’s beginnings in the airline industry and argues that these sort of schemes only make sense in industries, such a air travel, "in which a company can do nothing to differentiate itself from its competitors, and customers lack either the motivation or the price sensitivity to shop around."

For most businesses which should be able to think of a better reason to come through the door than an occasional freebie, loyalty cards are a trap, he concludes, citing a long history of management research:

Business management scholars have written piles of studies on customer loyalty programs, and virtually all of them reach the same conclusion: In most industries, they’re hopelessly mismanaged. It’s not that the programs don’t work; it’s that they work too well. Customers become so well trained to follow loyalty discounts that they won’t buy without them. According to a 2002 article in the Harvard Business Review, many retailers now offer such extensive rewards for loyalty that they’re no longer making money on their top customers-;the very people the programs are supposed to entice. In addition, most customers engage in what researchers call “polygamous loyalty,” which is a creative way of saying disloyalty. The overwhelming majority of fliers, for example, belong to multiple rewards programs. It’s a race to the bottom.

In other words, once you hand over that card or fob, you’re telling your customers that the only thing they should value you for is what they get through the loyalty programs. It’s an invitation to penny pinch. While the article does offer some exceptions, including grocery store loyalty programs with levels of customer tracking that would make the NSA blush, for most businesses "loyalty cards are usually a bad business strategy," Palmer writes.

Still sticking by your loyalty program? Then at least keep up with the latest research on how to structure them effectively. Instant gratification, the experts say, is in. Expensive buy ins and long delays between purchase and pay off are out.